A lot of businesses worry about expanding into overseas markets, and rightly so; for every new country, there’s a new list of concerns. Every country you expand into almost feels like starting a new business from the ground up, over and over again. Since a lot of money is tied up in an expansion venture, and you’re often dealing with an entirely new currency in a completely different economy, the financial risks often make businesspeople pause.
While it’s impossible to entirely eliminate financial risk, it’s always possible — and preferable — to minimize it. Nothing in business is certain, but using sound financial practices can help you keep yourself safe when dealing overseas — and we’ve got a few important tips to get you started.
1. Spend a Long Time Courting People
You aren’t going to be able to make many surprise visits to your locations overseas just to see how things are doing; this kind of expansion means you won’t be able to just pop in to say hello. This is something we take for granted when we do business locally, but it’s a luxury people don’t have when they’re dealing with a client or a customer base that’s so far away.
Before you start doing business with anyone overseas, take your time to get to know them. This process should be a lot more complicated than a normal job interview since it’s extraordinarily difficult for you to oversee what this person is doing from such a great distance. That’s why patient businesspeople often wait years to formalize overseas business deals — they spend that time establishing trust.
While you’re vetting and courting people who can potentially help facilitate these overseas deals, start examining their professional performance. How are their companies doing? What does their reputation look like? Are there people you can contact as references? Leave no stone unturned. The longer you spend getting to know people, the more time you have to identify and assess any risk factors that may negatively impact you financially.
2. Keep the Operation Small Scale
The easiest way to minimize risk is to risk less. If you believe you’re comfortable enough to proceed with an overseas arrangement but you’re still risk-averse, just start small. Keep your transactions to a minimum for a while. Establish a better rapport with the other party while familiarizing yourself with their habits. If they prove to be reliable (even after a few adjustments or renegotiations), slowly increase the amount of money involved.
If things don’t go the way you want them to, you’re only losing out a little bit on a single transaction. It’s easy to put a full stop on the whole thing the moment you become uncomfortable. Slowly scaling keeps you from going in blind. You have the option to retract if you feel as though circumstances are less than ideal or you suspect some kind of improper activity is taking place on the other end. Even if you lose money, you have greater control over the total amount of money involved.
3. Hedge Your Currency
Some businesspeople fear doing business overseas simply because of the currency exchange rates. You can be wildly successful and have the best business relationships in the entire world, and it still won’t impact the value of another country’s currency. This is a risk that cannot be avoided by simply making smart deals and building fantastic relationships. Instead, the most effective way to mitigate this risk is through currency hedging.
Currency hedging is when you utilize a contract that protects the current value of the currency. If anything happens that affects the value of that currency, you’re locked into that exchange rate. This situation might be less than ideal if the value of the currency goes up, but it’s designed to protect you in the event that the value goes down.
There are several ways to hedge currency. Each method comes with distinct advantages and disadvantages, but the most popular method is through the purchase of forward contracts. These contracts lock in an exchange rate and swap currency on a particular date. You can make a deal when the exchange rate looks good to you, lock it in with a forward contract, and swap the currency at the agreed upon date.
4. Assume Less Responsibility
If you’re in the business of selling products, you don’t necessarily need to move into an overseas market completely. As an alternative, you can work with a foreign distributor. This business or person would purchase wholesale inventory from you. It would be their job to figure out how to resell it and what to resell it for – you’ve already been paid for your part of the deal.
If you can arrange your overseas dealings to primarily involve importing and exporting, the only things you need to worry about is receiving a single payment and the timely arrival of a package.
5. Consider the Political States of Other Countries
Changes in power lead to changes in the way business is conducted. New tariffs, rules, and regulations can be imposed that will cause you to lose money in other markets. The best way to minimize that risk is to avoid countries that are less financially stable due to volatile leadership.
Look at the histories of those countries and see if similar changes have happened in the recent past. Consider the future the country is coming into. Are things getting better or worse for international business based on that country’s trajectory? If things look bleak or uncertain, don’t make deals in those countries. Always stick to the sure thing.
Though doing business overseas may seem risky, it has the potential to be one of the most advantageous decisions you’ll ever make. Your earnings potential at home is limited – things only become close to infinite when you’ve made your way into every possible market. As long as you make informed decisions and pace yourself, you can minimize your risks — and maximize your rewards.
Amanda Singh is a project manager, working as a part of the team behind Sitecraft, an experienced materials handling equipment provider. Overseeing numerous projects and working with different teams has provided Amanda with experience, which she now shares with other team leaders and managers out there.